I would like to point out some serious weaknesses in this article:
1) "...although academic research has shown that the Bundesbank habitually strayed far from the target and yet controlled inflation vigorously. "
This research stands on a questionable basis as is pointed out for example here: http://www.bundesbank.de/download/volkswirtschaft/dkp/2004/200425dkp.pdf ("A distinctive feature of the Bundesbank´s monetary
policy since 1975 was that it announced targets for monetary growth and - according to
its own descriptions - based monetary policy decisions on deviations of actual money
growth from these targets. However, contrary to that description, recent empirical
studies generally find that monetary aggregates did not play a significant role for the
Bundesbank´s interest rate decisions. We find that this “contradiction” can be explained
by two deficiencies of the respective empirical analyses. First, the use of ex-post revised
data ignores that the data and estimates relevant for monetary policy decisions
underwent major revisions in the course of time ...." Result of the study: "This suggests that the Bundesbank took its monetary targets seriously").

Even more clearly, in this German article by long-time Bundesbank head Helmut Schlesinger (http://www.metropolis-verlag.de/Die-Bundesbank-und-ihre-Geldmengenpolitik/10909/book.do) the author says very clearly that the monetary target in fact was of central importance in the decisions of the Bundesbank. His 2002 article goes on to criticize an article by a certain Ben Bernanke written in 1997, saying, "In the younger literature there are controversial opinions regarding the role of the money supply target in the Bundesbank's decisions. ... With all due respect, I have to comment on these. I add that some of the questionable statements of the authors may stem from the fact that they are not fluent in German and do not know the German-language literature and the many notes by the Bundesbank, in any way, they have not correctly understood the aim of the Bundesbank with their models." The article then goes on to point out how the econometric models by Bernanke et al. failed to grasp what the Bundesbank was doing.

In terms of "habitually straying" from the money supply target: the article linked above shows that the Bundesbank reached the target more often than it did not, and in the years when it did not, the distance was often small.

2) "The U.K. and the U.S. have both pursued major quantitative easing programs without running into significant inflation problems."
The strongly expanding money supply in the years before 2008 has led to enormous asset inflation e.g. in the housing market. This asset inflation (bubble) created the current mess. How short-sighted can you be to say that this lose monetary policy "did not create any significant inflation problems" simply because CPI (consumer price inflation) did not show much inflation? Similarly, the recent reflation of the economy is much too new to make any far-reaching claims about its inflationary results.

These matters concern central issues behind the current economic disaster we are in, and I respectfully ask the WSJ author to put some more diligence into these central questions.

6:02 am June 18, 2010

Matthew Dalton wrote:

Hello Chris,

Thanks for your comment, and I'd like to respond to your two points:

1) The paper you link to disputes a specific claim that the Bundesbank in fact followed a Taylor rule as opposed to a strict monetary growth target. But I wasn't arguing that the Bundesbank followed a Taylor rule. And the paper largely agrees with the research I was referring to, in that they both conclude that the Bundesbank was not a strict monetary targeter. The bank did in fact frequently miss its money supply growth target, which is not to say that it didn't actually use monetary targets as an important part of its policymaking.

Of course, as the paper discusses, the Bundesbank's use of the targets probably made them more hawkish - or paranoid, depending on your view - on inflation. This attitude is carrying over to the ECB's monetary policy, making them more reluctant to take aggressive steps like the Fed and the BOE to fight the deflationary threats of the financial crisis. To your second point....

2) The question of whether loose money leads to asset bubbles is an interesting topic and the subject of some debate (and perhaps the topic of another blog post.) Bernanke and a bunch of other economists say no. Among other reasons, across a number of different countries there doesn't seem to be a significant correlation between housing prices and monetary policy (for example, the inflation-fighting ECB oversaw major real estate bubbles in ireland and Spain, where housing prices rose even more than in the US.) Check out this slide:

Bernanke points out that foreign capital flowing into these countries (German money into Spain, Chinese money into the US) combined with loose mortgage origination standards are a good explanation of the bubble... seems convincing to me.

anyway, thanks for your comment.

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The Wall Street Journal’s Brussels blog is produced by the Brussels bureau of The Wall Street Journal and Dow Jones Newswires. The bureau has been headed since 2009 by Stephen Fidler, who was previously a correspondent and editor for the Financial Times and Reuters. Also posting regularly: Matthew Dalton, Viktoria Dendrinou, Tom Fairless, Naftali Bendavid, Laurence Norman, Gabriele Steinhauser and Valentina Pop.